Hedge Fund Bets 14.1% On Under-the-Radar Stock

Voss Capital is a hedge fund with approximately $464 million in assets under management, and yet has made one enormous bet on a single stock that lies largely under the radar of most retail investors.

The investment team at Voss have bet 14.1% of their portfolio on a company, called Griffon Corp (NYSE:GFF). So what is it about this firm that has attracted so much interest?

What Exactly Does Griffon Do?

It’s perfectly understandable to wonder what on earth Griffon actually does if you haven’t come across it before. Frankly, it’s not the type of company you can point to a single thing, like an iPhone, and say it makes “that” thing.

That’s because Griffon is comprised of two primary businesses under a single corporate umbrella. The first is Home and Building Products, where the company stands out as the largest manufacturer of garage and rolling steel doors in the US.

Whether residential or commercial, this division of the firm which operates under the brands Clopay, Ideal and Holmes, and sells these garage doors as well as grille products. Notably, Clopay has an eye-popping 2,700 employees.

The other primary business under the Griffon hood is in the Consumer and Professional Products area. Under the AMES organization, Griffon markets professional tools and products for home storage, organization and landscaping, and it does so via various brands, such as Temper, ClosetMaid and Hunter Fan. Remarkably, another 3,200 employees work in this arm of the business.

So that’s a little about the business, but what is it that Voss Capital has seen to warrant the company earning the largest spot in its portfolio?

Why Did Voss Capital Buy Griffon Stock?

Voss Capital likely bought Griffon stock for its 5.1% dividend yield and because it’s 31.3% undervalued according to analysts estimates.

There are a whole bunch of other reasons to consider Griffon beyond the income opportunity and valuation but before we get to those it’s worth noting that the payout ratio is just 31%, so the opportunity to boost the yield over time is considerable.

And then there’s something else that’s very interesting about Griffon which should pique the interest of value investors. Over the past decade, virtually every single year operating income has climbed. It has risen from $42.4 million back then to $212 million most recently.

In addition, back in 2014, EBIT was $87.5 million whereas in the past fiscal year it had climbed to $397.7 million.

As you turn the pages on Griffon’s financials, it’s clear why the investment team at Voss found the stock to be so intriguing. It’s been profitable over the past twelve months and yields a high return on invested capital of 11.7%.

Another point in favor of the stock is the conviction management appears to have in the intrinsic worth of the enterprise. Over and above the $150 million worth of shares repurchased in the first three quarters of the year, the Board of Directors approved a further $200 million buyback.

With that said, it’s hard to find the perfect company and three items can be viewed as counting against Griffon.

First, balance sheet cash sits at $102 million against $1.4 billion in debt. Admittedly, that ratio is less stellar than we would like to see but for a $2.5 billion market cap firm, it’s reasonable.

Secondly, and maybe of more concern is the fact that the P/E ratio sits at 33.2x. That’s high for a firm that is not in the technology sector growing quickly.

And lastly, on a technical note, the RSI is largely overbought at this time, suggesting a cooling off period may be needed before an ideal entry point can be found.

Griffon Valuation

Although analysts have a high price target of $67 per share on Griffon, a discounted cash flow analysis is more pessimistic and pegs fair value closer to $51 per share. That seems to align more closely with the elevated PE ratio of close to 33x.

Still, Griffon is a really interesting firm with a lot to offer. It’s rare to find a company that can squeeze out a profit every year for ten years straight. Indeed, it suggests that, even at times when revenues decline, as they did in the past year by 5.7%, the business model is sufficiently strong to withstand top line pullbacks and still produce bottom line profits.

One very key trend that is worth spotlighting is the increase in gross profit margin almost every single year. A decade ago, it sat at 23.1% and it’s steadily increased since then to a ten year high in the most recent fiscal year of 38.4%.

Lastly, for income-seekers, the 5% plus dividend on offer now is still highly attractive, even with GFF share price up 42.7% year-to-date.

The combination of steadily growing earnings and attractive dividend suggest the future will remain bright for Griffon long into the future.

Time to Buy Griffon?

Griffon is a company that flies far under the radar of most investors and it’s understandable why. Investing in the top garage maker in the US doesn’t exactly seem like the most compelling investment idea when hot AI stocks are an alternative.

Yet, this is a company that has managed to etch out a profit year after year, regardless of sales cycles. The share price is up by over 40% this year and still the company is paying out a 5% plus dividend.

And it’s still so compelling a value proposition that management is willing to commit another $200 million to repurchasing shares. 

All that together appears to make for an enticing buy, the only question is when. On that front, it would seem that the high PE ratio north of 30x and the overbought technical trend now suggest a wait-and-see approach.

On a pullback to a more attractive technical level, though, it’s hard to argue much with the compelling fundamentals, which have earned the stock a very sizeable 14.1% stake in the Voss Capital portfolio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.